We are going back to the fall of 1998, back in the 'midst' of the new economy. The U.S. economy weathered the E. Asian quite well and the U.S. economy, by almost all accounts, was performing brilliantly. In August of 1998, Russia defaulted on all the debt held by foreign investors. This "shock" rattled financial markets so much that the Fed went into action and lowered short term interest rates 3 times in a seven week period. In what follows, we are going to model this 7 weeks period using our new acquired reserve demand / reserve supply diagram.

Here are the relevant dates and interest rates:

Point A: August 1998: i_ff = 5.5%

Point B: September 1998: Lowered interest rates to i_ff =5.25%

Point C: October 1998: Lowered interest rates to i_ff = 5.00%

Point D: November 1998: Lowered interest rates to i_ff = 4.75%

Note importantly, we are modeling the behavior of the federal funds rate during this period. The forecasted reserve demand at this time is given below. For simplicity, this reserve demand function is stable (constant) throughout this exercise:

R_d = 950 - 110 i_ff

What is the value of the Reserve Supply in August 1998? ANSWER: 345 this information goes along with the question below that I need help with.

QUESTION:

A) HAND DRAW the Reserve Demand and label it R_d. Then add the reserve supply associated with #13 above and label it R_S^A. Then label the intersection of the R_d and R_s as point A. Label the value for i_ff and the value of the reserve supply on the horizontal axis.

B) HAND DRAW the reserve supply associated with #15 (345) above and label it R_S^B. Then label the intersection of the R_d and R_s as point B. Label the value for i_ff and the value of the reserve supply on the horizontal axis.

C) Is this change in the R_s due to open market purchases or sales?

D) What is the value of the Reserve Supply in October 1998?

E) HAND DRAW the reserve supply associated with D's answer above and label it R_S^C . Then label the intersection of the R_d and R_s as point C. Label the value for i_ff and the value of the reserve supply on the horizontal axis.

F) What is the value of the Reserve Supply in November 1998?

G)HAND DRAW the reserve supply associated with G's answer above and label it R_S^D . Then label the intersection of the R_d and R_s as point D. Label the value for i_ff and the value of the reserve supply on the horizontal axis.